25 service tax n vat

8/6/2019 25 Service Tax n Vat

1/31

SERVICE TAX & VAT FOR CA PCC/IPCC

Experts Professional Academy

CA. Gopal R Rathis Initiative......... Page 1

Q.NO.1) WHAT IS THE NEED OF INTRODUCTION OF SERVICE TAX ?

Need for Taxation of Services : It is the prime responsibility of the Government to fulfill theincreasing development needs of the country and its people, by way of public expenditure. TheGovernments primary sources of revenue are Direct and Indirect taxes. While Direct taxes areimposed on persons Income directly, Indirect Taxes are levied on Goods and Services. CentralExcise Duty on the goods manufactured and produced in India and Customs Duties on importedgoods constitute the two major sources of indirect taxes in India. The revenue receipts from customsand excise duties have been declining due to WTO commitments and rationalization of commodityduties. On the other hand, Service sector has been growing phenomenally all over the world.

Services are so widespread and encompass almost all activities like management, banking,insurance, travel, other professional services like CA,CS, Lawyer etc. Contribution made by servicesector has also been increasing, thereby pushing back the traditional contributors like agriculture andmanufacturing sector. Exclusion of service sector from indirect taxation leads not only to the loss ofconsiderable potential revenue, but also creates distortion in allocation of resources.

In 2002, Service sector accounted for 49.2% of GDP while agriculture accounted for 25% and industry25.8% of GDP of India.

Objectives of Introducing Service Tax are,

To introduce value added tax (VAT) system to eliminate cascading and cost inflation effect inIndirect taxation.

To widen the taxation base so as to make possible a reduction in the general level of rates ofcommodity taxes.

To merge tax on goods & services for eliminating multiple levels and for bringing about singlelevels called Goods & Service tax (GST) through out country.

Q.NO.2) EVALUATION OF SERVICE TAX IN INDIA ?

Service Tax in India : The levy of Service tax can be traced back to recommendations made in early1990s by Tax reforms committee headed by Professor Dr. Raja J. Chelliah. The committeerecommended imposition of tax on select services.Based on these recommendations, Dr.ManmohanSingh, the then Union Finance Minister, in his Budget Speech for the year 1994-95 introduced the newconcept of Service Tax and stated as under:

There is no sound reason for exempting Services from taxation, where goods are taxed and many

countries treat goods and services alike for tax purposes. I, therefore, propose to make a modesteffort in this direction by imposing a Tax on Services of Telephone facility, Non Life insurance, andStock Brokers.

Therefore, the Service tax was levied under Chapter V of the Finance Act, 1994.

It was introduced for the first time on 3 services with a nominal rate of 5% thereafter in 2003 ratewas increased to 8%, in 2004 to 10% and to 12% in the year 2006.

However in 2009 the rate is again reduced to 10%.

Subsequent Finance Acts have added more services within the ambit of Service Tax.

As present there are 106 services in the net of Service Tax.

The Service tax collections have grown manifolds since its inception i.e from Rs.410 crores in1994-95 to Rs.14196 crores in 2004-05.


2/31



CA. Gopal R Rathis initiative. Page 2

There is substantial growth in number of assesses also i.e from 3943 in year 1994-95 to 774988 inthe year 2004-05.

Q.NO.3) EXPLAIN BRIEFLY THE APPROACHES OF LEVY OF SERVICE TAX?

Selective or comprehensive coverage of service tax: The levy of a service tax can be based on eitherof the following 2 approaches:

1. Comprehensive coverage/approach: In comprehensive approach all services are taxable and anegative list is given in case some services which are to be exempted. Such a comprehensiveapproach is operational in many developed nations.

2. Selective coverage/approach: In the case of selective approach, only selective services are subject toService tax. In this case, the legislator attempts to specify and list the services that would be taxableand the scope of coverage of each service. There is no residuary category for taxing all services.

India has adopted selective approach to taxation of Services where only those services which arespecified are made taxable and others are not taxable at all.

Q.NO. 4) BRIEFLY EXPLAIN THE NATURE OF SERVICE TAX?

Nature of Service Tax: Service tax is a tax on Services. Service tax is not a tax on profession /trade but is a tax on the service provided in exercise of the profession/ trade. It is leviable only ifthere is provision of service. While Profession Tax is levied on a right of a person to carry on aprofession even though Service is not rendered, Service tax is leviable only if taxable service is

provided. What is Service ? Service means a useful result/product of labour, which is not a tangiblecommodity. i.e. which cannot be seen through eyes. Thus, service is a value addition that can beperceived but cannot be seen.

Q.NO. 5) WHAT IS THE CONSTITUTIONAL BACK GROUND OF SERVICE TAX ?

Constitutional Background: According to Article 265 of the constitution India, no tax of anynaturecan be levied or collected by Central or State Governments expect by the Authority of Law.According to Article 246, law can be enacted by Parliament or the State Legislature, if such power isgiven by the Constitution of India.

List I Union list Parliament has the exclusive right to make in respect of that entry.

List II State list State legislature has exclusive power to make laws for such state or any partthereof with respect to such entry.

List III Concurrent list The parliament or the legislature of a state has power to make laws withrespect to any matter enumerated in List III.

There are various matters enumerated in each list. Each matter in the list is known as an entry.

Entry 97 of the Union list is the residuary entry and empowers the Central Government to levytax on any matters not enumerated in List II (State List) or List III (Concurrent List).

In 1994 the Service Tax was levied by the Central Government under the powers granted underthe said Entry 97 of List I.


3/31




Entry 92C has been inserted to the 1st List in the VIIth Schedule (so as to make the enactment asubject matter of Union List). Thus it is expected that separate Service tax legislation will beenacted which will also pave the way for inclusion of services within the purview of VAT.

In fact a draft Service Tax Act has already been prepared for consideration by the parliament butthe Government is now planning to move to Goods and Service Tax (GST Act).

Although the Government has amended the Constitution and inserted entry No.92C the List 1 ofSchedule VII but No Separate Act has been passed yet and service tax is still being governed byentry 97 i.e. residuary entry.

Q.NO.6) WHAT ARE THE STATUTES GOVERNING SERVICE TAX?

An understanding of the service tax law requires the study of the following:

Service tax was introduced in 1994 but there is no independent statute on Service Tax yet. Howeverfollowing sources provide statutory provisions relating to Service tax : -

1. Finance Act, 1994 :-

The provisions relating to Service Tax are contained in Chapter V of Finance Act, 1994. In the year2003 chapter VA was also introduced to contain some provisions relating to Service Tax.

2. Rules on Service Tax.

Central Government is empowered to make rules for carrying out the provisions relating toService Tax. Rules should be read with statutory provisions contained in the Act. Rules are madefor carrying out the provisions of the Act. Rules can never override the Act and can not conflictwith the same.

3. Notifications on Service Tax

Central government is empowered to issue notifications to exempt any service from service taxand to make rules to implement service tax provisions.

4. Circulars and clarifications issued by Central Board of Excise and Customs (CBEC).

5. Trade Notice issued by respective Jurisdictional Commissionerate.

6. Definitions given under other statutes, Judicial decisions of Supreme court, High Court.

Q.NO.7) EXPLAIN ADMINISTRATION OF SERVICE TAX ?

The Department of Revenue functioning under Ministry of Finance exercises control in respect of

matters relating to all the Direct Taxes and Indirect taxes through the two statutory borads namely,Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC). Mattersrelating to the levy and collection of all the direct taxes (income tax, wealth tax etc.) are looked afterby CBDT, whereas those relating to levy and collection of indirect taxes (customs duties, centralexcise duties etc.) fall within the purview of CBEC.

The Board administers service tax matters though service tax zones and each zone is headed by aChief commissioner of Central Excise.


4/31




Ministry of Finance (Central Government)

Department of Revenue

Central Board of Excise and Customs (CBEC) Central Board of Direct Taxes (CBDT)

(Monitoring Excise, Customs & Service Tax matters) (Monitoring Income Tax, Wealth Tax matters)

Q.NO 8) WHAT IS THE ROLE OF CHARTERED ACCOUNTANT ?

Service tax is an indirect tax and being a new legislation, there a great scope for professionals likeChartered Accountants, Company Secretaries and others. Unlike income tax only few professionalsare practicing in the field of indirect tax. A CA can render numerous services to his clients or theemployer. The nature of services that he can render are:-

1)Consultancy / Advisory Service : A CA can be an advisor who can interpret the law, who canunderstand the law and advice on applicability of service tax as since a selective approach is adoptedto collect tax by the Government it is necessary to know which service tax is taxed and not taxed.

2)Assistance in procedural compliance : A CA can assist in registration, payment of tax, filing ofreturns etc. A CA can does ensure procedural compliance of the law.

3)Representational Service : A CA is allowed to represent the assessee before the excise & service taxauthorities. A CA with experience & expertise can represent before Commissioner Appeals &Tribunal successfully.

4)Certification and Audit : In future, Department may require CAs to certify Service Tax returnsand Financial Statements similar to Tax Audit under section 44AB of Income Tax Act, VAT Auditunder Various State VAT Laws.

Service tax is a new tax imposed in 1994. A CA can assist in audit of the books of accounts of theassessee with special reference to service tax and can ensure that the assessee has followed all theprovisions of the act and the rules.

A CA with continuous reading skills can keep pace with latest developments in service tax law likenotifications, circulars, etc., which will add value to his clients or the employer.

Q.NO 9) EXPLAIN AS TO HOW AND WHEN THE AMENDMENTS MADE IN FINANCE BILL,IN RESPECT OF SERVICE TAX MATTER COME INTO FORCE ?

Applicability of Service Tax Law :-

The law relating to service tax extends to whole of India except the State of Jammu and Kashmir. i.e.Services provided in the state of Jammu & Kashmir are not liable to Service Tax but if a person from

the state of Jammu & Kashmir provides taxable service outside its state to any part of India, Servicesso provided will be liable to Service Tax.


5/31




Amendments in the Finance Bill : Amendments made in the Finance Bill in respect of Service taxmatters become effective from the date when the relevant Finance Bill gets the assent of the Presidentand it becomes Act. Further, new services which are introduced shall become taxable when theseservices are notified in the official gazette of India or from the date mentioned in such Notification.

Service Tax is applicable to taxable services provided on or after the commencement of Chapter V of

the Finance Act. 1994.

Q.NO.10) EXPLAIN THE FEATURES OF SERVICE TAX ?

Salient features of levy of service tax: -

1. Scope: It is leviable on taxable services 'provided' or 'to be provided' by a service provider.The services 'to be provided' in future are taxed only if payment in its respect is received in advance.

Services provided or to be provided must be the one which is covered in section 65(105) of Finance Act,

1994.

2. Rate : It is leviable @ 10% of the value of taxable services. Education Cess @ 2% and Secondary andHigher Education Cess @ 1 % are chargeable on the amount of service tax, thus, making the

Effective rate of service tax at 10.3% of the value of taxable service.

3. Taxable services : Service tax is leviable only on the taxable services. Taxable services mean theservices mentioned under section 65(105) of the Finance Act, 1994.

4. Value : For the levy of the service tax, the value shall be computed in accordance with section 67 ofFinance Act, 1994 read with Service Tax (Determination of Value) Rules, 2006.

5. Free services not taxable :No service tax is leviable upon the services provided free of cost.

6. Payment of service tax :The person providing the service (i.e. the service provider) has to payservice tax in such manner and within such period as is prescribed in the Service Tax Rules, 1994. Theservice tax is to be paid only on the receipt of payment towards the value of taxable services.

7. CENVAT credit :The credit of service tax and excise duty across goods and services is allowable inaccordance with the CENVAT Credit Rules, 2004.

Accordingly, output service provider (i.e. provider of any taxable service) can avail cenvatcredit of

Service tax paid on any input service consumed for rendering any output service.

Excise duty paid on any inputs and capital goods used for rendering output service.

CENVAT credit so availed can be utilized for payment of service tax on taxable output service.

8. Services provided by an unincorporated association/body to its members also taxable[Explanation to Sec. 65] : 'Taxable service' includes any taxable service provided or to beprovided by any unincorporated association or body of persons to a member thereof, for cash,deferred payment or any other valuable consideration. Hence, the services (falling under anycategory of taxable service) provided or to be provided by any unincorporated association/bodyto member thereof shall be liable to service tax. This provision is an exception to the 'principle

of mutuality'.


6/31




9. Performance of statutory activities/duties, not 'service':An activity performed by a sovereign/public authority under provisions of law does not constitute provision of taxable service to a personand, therefore, no service tax is leviable on such entities.

10. Import/Export of services:While import of services is chargeable to tax u/s 66A, the export ofservices has been made exempt from tax. Import/export provisions are discussed separately.

11.The Department of Revenue of the Ministry of Finance exercises control in respect of mattersrelating to all the direct and indirect taxes through two statutory Boards, namely,the CentralBoard of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC).

The responsibility of administration and collection of service tax has also been vested upon theCBEC.

Q.NO.11) SUMMARIZE THE EXEMPTION AVAILABLE TO SERVICE TAX ASSESSEES?

Service Tax Exemptions:

1. General Exemption from Service Tax for certain assessee:

a) Service Provider

Services provided by the following are exempt:

Reserve Bank of India (RBI)

Small service Provider (SSP) (upto a turnover of Rs.10 lakhs)

Entrepreneur in Technology Business Incubator (TBI)

Entrepreneur In Science and Technology Entrepreneurship park (STEP)

b) Service Receiver

Service Provided to the following are exempt:Reserve bank of India(RBI)

Developers of Special Economic Zone (SEZ)

Unit in SEZ

United nations, International organizations, Foreign Diplomatic missions

2. SMALL SERVICE PROVIDER EXEMPTION (SSP)

a) Exemption granted through notification No.7/2007 ST dt. 01.03.07.

b) Exemption is upto a turnover (money received) of Rs.10,00,000 in a financial year.

i.e. To determine whether assessee is eligible to claim SSP exemption in current year, what isrelevant is aggregate value of taxable services provided in preceding year shall be less thanRs.10 lakhs.

c) On crossing money received towards taxable service in excess of Rs.10,00,000/- tax is payableat the usual rate and CENVAT credit can also be availed.

d) The service Provider shall opt for the exemption.

e) Option is irreversible till the end of that financial year.

f) Registration is necessary if the turnover (receipt of money towards value of taxable service)

exceeds Rs.9,00,000.


7/31




Eg. If CA.Gopal Rathi opts to claim SSP benefit during the Financial year 2009-10, he has tosatisfy the criterion of Rs.10,00,000, during the Financial Year 2008 09.

g) Exemption is available in the current year, if in the previous year, the aggregate value oftaxable services provided does not exceed Rs.10,00,000/-

Exemption can be claimed upto aggregate money received towards value of taxable servicesduring the current year upto Rs.10,00,000/-.

However the above exemption shall not apply to :-

i. taxable services provided by a person under a brand name or trade name, whether registered ornot, of another person; or

ii. Such value of taxable services in respect of which service tax shall be paid by such person and insuch manner as specified under section 68(2) of the said Finance Act read with Service Tax Rules,1994 i.e. where service tax is payable by the service recipient instead of service provider.

3. Service tax not leviable on fee collected by public authorities while performing statutoryfunctions/duties under the provisions of a law :-It has been clarified that service tax shall not be leviable on fee collected by public authoritieswhile performing statutory functions/duties under the provisions of a law. However, if suchauthority performs a service, which is not in the nature of statutory activity and the same isundertaken for a consideration not in the nature of statutory fee/levy, then in such cases, servicetax would be leviable, if the activity undertaken falls within the ambit of taxable services.e.g Regional Transport Officer (RTO) issues license to the vehicles for that Fee as prescribed ischarged and the same is ultimately deposited into the Government Treasury. Such activity ispurely in public interest and it is undertaken as mandatory and statutory function. These are notin the nature of service to any particular individual for any consideration. Therefore it is not ataxable service and no service tax is leviable on such activity.

4. Exemption to services provided by a person located outside India in relation to booking ofaccommodation for a customer located outside India in a hotel in India :-The taxable services provided by a person, having his place of business, fixed establishment,permanent address or usual place of residence, in a country other than India, and which is receivedby a hotel located in India, in relation to booking of an accommodation in the said hotel, for acustomer, who has his place of business, fixed establishment, permanent address or usual place ofresidence, in a country other than India are exempt from whole of the service tax leviable thereon.Hotel has been defined to mean a place that provides boarding and lodging facilities to public oncommercial basis.

Q.NO.12) EXPLAIN BRIEFLY THE INCIDENCE FOR LEVY AND COLLECTION OF SERVICETAX AND EFFECTIVE DATE OF TAXATION ?

Taxability: The taxability otherwise of a service with reference to the effective date for levy is as under

1. Effective date = Date on which a service is made taxable for the first time (OR) date from which aservice is included in the taxable service.

On the date on which service is provided, Service must be taxable irrespective of date of receipt ofconsideration.

2. Service will not be taxable even if the bills are raised or payment received after the effective datehowever service is provided before the effective date.


8/31




3. Service will be taxable even if the advance was received before the effective date of levy.

In short, No service tax is payable for the part or whole of the value of services, which is attributableto services provided during the period when such services were not taxable. The time of receipt ofpayment towards the value of services will not be relevant for this purpose. For instance, no servicetax shall be payable in case of newly introduced legal consultancy service which is rendered prior to01.09.2009. (Legal consultancy service has become effective from 01.09.2009).

Q.NO.13) EXPLAIN THE VALUATION OF TAXABLE SERVICE FOR CHARGING OF SERVICETAX ?

Valuation of taxable services for charging service tax: As per section 67, Service tax is to be charged@ 10% of the value of taxable service provided or to be provided. Hence, we have to determine thevalue of such taxable services so as to pay service tax.

If the consideration consisting of Case 1) Where the provision of service is for a consideration in money, value of such service shall bethe gross amount charged by the service provider for such service provided or to be provided byhim.E.gIf a CA charges Rs.50,000 as audit fee from its client, the value of the taxable service rendered bythe chartered accountant will be Rs.50,000 and service tax shall be payable on this amount.

Case 2) If the consideration for a taxable service is not wholly or partly in terms of money, then thevalue of such service shall be such amount in money, with the addition of service tax charged, isequivalent to the consideration.In other words, where the service rendered is for a consideration not wholly or partly consisting ofmoney, the value of the taxable service is equivalent to the total value of the consideration. However,the total of such money and non-money value of the consideration has to be treated as inclusive theservice tax payable thereon.E.gMr. X, a company secretary provides taxable professional services to one of its clients. In lieu ofrendering such services, Mr.X charges Rs.10,000 in lumpsum from its client and also asks its client togive him a Law book worth Rs.1,030. The total consideration in this case will be Rs.11,030 and thevalue of the taxable service shall be Rs.10,000 (11030 * 100/110.30) and Rs.1,030 shall be the servicetax payable.

Case 3) Consideration includes any amount that is payable for the taxable services providedor to be provided. Thus, an advance received for providing any taxable service shall also form part ofthe consideration.E.gMr. A, an architect receives an advance of Rs.1,000 for providing architectural services. He getsRs.6,000 on completion of provision of such services. The consideration in this case would be Rs.7000,i.e. it would include the amount that is payable for the taxable service to be provided and taxableservice provided.

Case 4) Where the gross amount charged by a service provider, for the service provided or tobe provided is inclusive of service tax payable, the value of such taxable service shall be such amountas, with the addition of tax payable, is equal to the gross amount charged.Example : Mr. B, a management consultant charges a lump sum amount of Rs.22,060 as professional

fee for rendering taxable services (i.e., he does not charge service tax separately). The value of taxableservice in this case would not be Rs.22,060 but Rs.20,000 i.e. (22060 *100/110.30) and Rs.1,030 shall bethe service tax payable.


9/31




1. Consideration also includes any amount which is payable for the taxable services provided or tobe provided.

2. Money includes any currency, cheque, promissory note, letter of credit, draft, pay order, travelers

cheque, money order, postal remittance and other similar instruments but does not includecurrency that held for its numistatic value.

3. Gross amount charged include payment by cheque, credit card, deduction from account and anyform of payment by issue of credit notes or debit notes and book adjustment.

4. Valuation where billing is inclusive of service tax: The assessee is to calculate service tax basedon reverse working.

E.g.: If the billing is done inclusive of service tax (Consider billing Rs.100 (inclusive) and realizationRs.100 (inclusive), the assessee can claim that the bill amount should be bifurcated into value andservice tax components. Accordingly the service tax payable shall be worked out in a reverse manner

i.e. (100 10.3/110.3) = Rs.9.34.

Q.NO.14) WHAT ARE THE EXCLUSIONS IN THE VALUATION OF TAXABLE SERVICES ?

Sale value of goods to be excluded:

Sale value of goods is to be excluded for payment of tax while value of materials consumed whilerendering of service can not be excluded.

However, There should be documentary proof specifically indicating the value of said goods and

materials. In certain cases, supply of goods is integral to the rendering of services.

The sale consideration for such supply of goods cannot be dissected from the service element and thesame shall be exposed to liability for service tax. Similarly, it has been clarified that in case ofcommercial training and coaching institutes, deduction will be not be available for any study materialor written text provided by the institute.

Reimbursement of expenses to be excluded in certain cases: The reimbursement claim can bepermitted only in cases where the service provider acts as a pure agent of the client when heprocures the goods or services or incurs the expenses on behalf of the client.

Q.NO.15) WHO IS A PURE AGENT ?

Pure agent is a person who has an agreement with service receiver to act as his pure agent to incurexpenditure for providing service. The salient features of a pure agent are:

1. He has no title over the goods/services provided to the client.

2. He cannot use them for his purpose.

3. He gets from the service receiver only the actual cost of such purchases.

E.g.: Contractor procures cement, steel etc. on behalf of the flat promoter, passes on the actual cost to

the recipient, possesses no title over the materials and leaves the balance materials at the site. In suchcases, Assessable Value shall be exclusive of cost of materials.


10/31




Q.NO.16) EXPLAIN TAXATION OF FREE SERVICES ?

No service tax on free services: No service tax is leviable if free services are provided by the serviceprovider.

However, if the authorized dealer of motor vehicle provides to customers free servicing of motorvehicles without charging any amount of service charge from the customers and vehiclemanufacturer reimburses the amount to authorized service station on account of such free services,the authorized service station shall have to pay service tax on the amount received from the vehiclemanufacturer for the purpose of servicing the vehicle.

Q.NO.17) EXPLAIN PROVISIONS REGARDING PAYMENT OF SERVICE TAX ?

1. Who pays Service Tax- Service Provider or Service Receiver?

Sec.68 imposes the responsibility on a person for paying service tax. As provided in this section,service tax is payable by the Service Provider.

Exceptions to this rule: In certain cases, as provided in Service Tax Rule 2(1)(d), the service taxshall be payable by the service receiver or the specified person and not by the service provider.

The following table summarizes such services and the person liable to pay service tax:

S.No Nature of the Service Service Provider Service ReceiverPerson liable to

pay tax

1.Insurance auxiliaryservices

Insurance agent Insurance companyInsurancecompany

2.

Service provided to a

person in India fromoutside India. (i.e Importof Service)

Person outsideIndia

Person in India i.eImporter of Service

Person in India i.eImporter ofService

3.

Goods transport agencyfor transport of goods byroad.Note: If the servicereceiver is individual,HUF etc., tax is payable bythe service provider (GTA)

Goods transportagency

a. Any registered factoryb. Any companyc. Any corporationd. Any registered Society

/ corporative societye. Any registered dealer

of excisable goods

f.

any registered firm orbody corporate

Person makingthe payment offreight (i.e.consignor orconsignee)

4.Business Auxiliary Serviceof Distribution of mutualfund

Mutual funddistributor /Agent

Mutual fund companyor Asset managementcompany

Mutual fundcompany or Assetmanagementcompany

5 Sponsorship ServiceSports Bodyproviding suchService

Any Body corporate /Firm in India

Any Bodycorporate /Firm in India

Payment of Service Tax Only on Receipt :-


11/31




It is to be noted that though the service provider charges service tax in his bill raised on his client asand when the service is provided, the service tax is payable to the Government only when the valueof taxable services is received. Thus, if a CA raises a bill for auditing services say, on 15th December,2009 for Rs.1,10,300/- (including service tax of Rs.10,300/-) and the client pays his bill only inFebruary 2010, the liability to pay service tax to the Government would arise only in February 2010.

Liability to pay Service Tax even if not collected from the client : -This liability is not contingent upon the service provider realizing or charging the service tax at theprevailing rate. The statutory liability does not get extinguished if the service provider fails to realizeor charge the service tax from the service receiver.However, sometimes it may happen that the assessee is not able to charge service tax because of thenature of service or he fails to recover the service tax from the client/customer as he is not aware thathis services are taxable. Hence, in these cases the amount recovered from the client in lieu of havingrendered the service will be taken to be inclusive of service tax and accordingly tax payable will becalculated by making back calculations.

Liability to pay Service Tax on Advance Received : -Service tax is payable as soon as the advance is received as taxable service includes service to beprovided .For example, a security agency takes a contract to provide security services to a client for the monthof October for a consideration of Rs.50,000. It receives an advance of Rs.25,000 from the client in themonth of September. In this case service tax shall be payable by the security agency on the amount ofRs.25,000 received as an advance even though the service has not been provided at that time.When advance payment is received for a service which is non-taxable at the time of receipt ofpayment but becomes taxable during the course of provision of service, such payments would haveto be apportioned appropriately between the two periods and that part of service provided on orafter the service becomes taxable service, is only liable for service tax.

When payment is received in advance for services to be provided but subsequently the services arenot actually provided, then in such cases service tax paid is liable to be refunded.

Q.NO 18) WHAT IS LIABILITY OF SERVICE PROVIDER IN CASE OF EXCESS COLLECTION OFTAX?

Excess collection of tax Sec. 73A & 73B

1. The service provider shall not collect tax in excess of what he pays to the Government.

2. The case when his collection is more than his payment, he shall immediately deposit the excesswith Central Government or where any person who has collected any amount which he is notrequired to collect from any person, such person should also immediately pay the amount socollected to the credit of Central Government.

3. Any delay in this regard attracts payment of interest @ 13% p.a.

Q.NO 19) WHAT ARE THE DUE DATES FOR PAYMENT OF SERVICE TAX?

1. Due dates for payment of Service tax.

Service tax had to be paid on a monthly / quarterly basis depending upon the status of theservice provider.


12/31




Service provider Monthly/Quarterly due dates Due date for the monthof March and Quarterending March

Individuals and Firms(Quarterly payment)

5th of the month following theQuarter ended June, September,

December

31st March

Others(Monthly Payment)

5th of the following Month 31st March

e-payment 6th of the following Month 31st March

2. Assessee who has paid Service tax of Rs.50 lakhs and more in the preceding year or has alreadypaid service tax of Rs.50 lakhs and more in the current financial year should pay tax electronicallythrough Internet banking.

3. If the last date for paying tax is a public holiday, tax may be paid on the next working day.

4. Tax is paid by debit to CENVAT account (if credit available) or through TR-6 challan inquadruplicate (4 copies).

5. The date of presentation of cheque to the designated bank shall be deemed to be the date ofpayment of service tax (But the cheque should not be dishonoured).

6. If tax has been paid to Government for service not provided i.e. on advance received, then theexcess payment made to Government may be adjusted in future dues, provided, the excess isrefunded to customer.

7. Service Tax collected by the Service provider/ Service receiver as the case may be, should beremitted within the due date to the credit of the Central Government.

8. Payment by cheque

The date of payment is the date on which the cheque is tendered to the designated bank provided

the cheque is not dishonoured in the course of clearing.9. Rounding off of tax:

The payment of service tax should be round of in multiple of Rupees.10.Advance payment of Service Tax : - The assessee may on his own make advance payment of

Service Tax and adjust the amount paid against service tax which he is liable to pay forsubsequent period. However he should intimate the Jurisdictional Superintendent of CentralExcise within 15 days of such payment and also indicate the details of advance payment and itsadjustment in subsequent returns to be filed u/s 70.

11.A multiple service provider (a service provider rendering more than one taxable service) can usesingle TR-6 challan for payment of service tax on different services.

Q.NO.20) EXPLAIN THE PENALTY CONSEQUENCES FOR DELAYED PAYMENT AND NONPAYMENT OF SERVICE TAX?

1. Interest on delay in payment of Service tax Section 75

a) Delay in payment of tax attracts interest @ 13% p.a.

b) The interest shall be payable for the period by which payment of tax is delayed.

c) The said period commences from the day following the due date and ends on the day of payment.

Eg: Mr.Gopal R. Rathi, Chartered Accountant, liable to pay service tax amounting to Rs.50,000/-

on 05.01.2010. But due to financial crunch, he has made the payment only on 31.3.2010. Whetherhe is liable to pay any interest on service tax, if so, what is amount of interest payable?


13/31




Ans: Mr. Gopal R. Rathi is liable to pay interest on delay remittance of service tax Sec.75.

Particulars Amount

Amount Payable Rs.50,000/-

Due Date for payment 05.01.2010

Actual Date of Payment 31.03.2010Period for calculation of interest 06.01.2010 to 31.03.2010 (85 days)

Amount of Interest Rs.5,000 13% x 85/365 = Rs.151

2. Penalties Secs. 76, 77 & 78

S.No. Nature of Violation Penalty

1. Failure to pay Service tax (Sec.76)

Not less than Rs.200 per day of defaultor 2% per month of tax whichever ishigher. In no case penalty can exceedthe amount of tax.

2. Failure of registration Rs.5,000 or Rs.200 per day whicheveris higher from the first day after duedate till the day of actual compliance.

3. Failure to maintain books of accounts. Maximum Rs.5,000/-

4. Fails to pay through e-payment Maximum Rs.5,000/-

5. Where no penalty is mentioned Maximum Rs.5,000/-

Q.NO 21) BRIEFLY EXPLAIN THE PROCEDURE FOR ADJUSTMENT OF EXCESS SERVICETAX PAID?

Adjustment of Excess Service Tax paid:

There is no provision for an automatic adjustment of such excess service tax except in a situationvisualized under

Where an assessee has paid to the credit of central government service tax in respect of

1. Taxable service which not so provided by him either wholly or partially for any reason, and

2. Taxable service the assessee has refunded the value of taxable services including service taxThereon to the person from whom it was received.

Then the assessee may adjust the excess tax so paid against the service tax liability for the subsequentperiod.

In case where an assessee has opted for centralized registration and has paid any service tax amountin excess of liability for a period due to non receipt of details of receipts from other premises oroffices, the assessee may adjust such excess amount against his service tax liability for the subsequentperiod.

Where the excess payment is due to any other reason the assessee has to applied for a refund U/s 11Bof the central excess Act.


14/31




Q.NO. 22) ARE SUB CONTRACTORS LIABLE FOR SERVICE TAX ?

ANS : A taxable service provider may outsource a part of the work by engaging another serviceprovider, generally known as sub-contractor.

Service tax is paid by the service provider for the total work. A question arises as to whetherservice tax is liable to be paid by the service provider known as sub-contractor who undertakes onlypart of the whole work.A sub-contractor is essentially a taxable service provider. The fact that services provided by such sub-contractors are used by the main service provider for completion of his work does not in any wayalter the fact of provision of taxable service by the sub-contractor. Services provided by sub-contractors are in the nature of input services(Input services are services which are used by a serviceprovider for providing the output service). Service tax is, therefore, leviable on any taxable servicesprovided, whether or not the services are provided by a person in his capacity as a sub-contractorand whether or not such services are used as input services. The fact that a given taxable service isintended for use as an input service by another service provider does not alter the taxability of the

service provided.

Q.NO 23) WHAT IS A PROCEDURE FOR REGISTRATION FOR SERVICE TAX ?

Registration: EveryPerson who is liable to pay Service Tax is required to register with Central ExciseDepartment within time limit as may be prescribed.

It means every service provider who is providing taxable service is required to get himself registeredwith Central Excise Department.

Application for Registration to be made in Form No. ST-1.

Central government may specify such other person or class of persons, who shall make anapplication for registration within such time and manner as may be prescribed.

1. Persons notified by the Central Government Special Category Persons:

a) Input Service Distributor:

(i) Office: Input Service distributor refers to an office of the

Manufacturer or

Producer of final products or

Provider of output service

(ii) Invoice: Which receives tax paid invoices (under Rule 4A of Service Tax Rules, 1994)towards purchases of input services and issues invoice, bill or challan.

(iii)Purpose: For distributing the credit of service tax paid on the said services to suchmanufacturer or producer or provider.

b) Small service provider whose aggregate value of Taxable Services exceeds Rs.9 Lakhs in afinancial year.


15/31




Time limit for registration :

Situation Time limit for registration

When Service Tax is imposed on a new service,and the service provider already has been

providing that service

Within 30 days from the date of levy of ServiceTax

In case a service provider commences thebusiness of providing the service which hasalready been made taxable

Within 30 days from the date ofcommencement of business

In case a service provider is already providing ataxable service and

a) Starts providing another taxable service,or

b) Provides a service which has now

become taxable.

No need for fresh registration, amendment forthe same in registration certificate i.e. ST-2should be applied within 30 days.

Normally, applicant will be the service provider. However, in exceptional cases the service receiverwith tax liability shall also register himself e.g. Importer of taxable Service is required to get registerwith CBEC.

Registration certificate (RC) is issued in Form ST-2 within seven days. For all the services providedby a person a single RC will do.

Q.NO.24) WHAT ARE THE DOCUMENTS TO BE ENCLOSED ON REGISTRATION?

Documents to be attached

An application for registration has to be accompanied along with the following documents:

1. Application in Form ST-1 in triplicate duly signed

2. Attested Copy of the PAN Card

3. Proof of Address of the premises which is required to be registered

4. Copy of the Document governing the constitution of the organization (Partnership deed in case ofa partnership firm, Memorandum of Association in case of a company, Trust Deed in case of atrusts or associations)

5. Authority Letters in favour of the person who is to collect the registration certificate on the Letterhead of the organization applying for registration.

6. Power of Attorney in case the documents are signed by an authorized representative

Q.NO.25) WHAT IS SERVICE TAX CODE NUMBER?

Service Tax Code: The department has decided to introduce Service Tax Code based on PAN. TheService Tax Code is a digit alphanumeric code. First 10 digits will be 10 character PAN issued by

Income Tax authorities. Next two characters will be ST. Last three will be numeric code 001, 002, 003etc. For example, Service Tax code number may be AAACA 8821 G ST 001.


16/31




Q.NO.26) WHAT IS CENTRALISED REGISTRATION ?

Where a person, liable to pay Service tax on a taxable service,-

1) Provides such service from more than one premises or office ; or2) Receives such service in more than one premises or offices (applicable when service tax is payable

by service recipient);

AND

Has centralized billing system or centralized accounting system in respect of such service, he may athis option, register such premise of office from where centralized billing system or centralizedaccounting system are located.

Q.NO.27) EXPLAIN THE CIRCUMSTANCE THAT CALL FOR MULTIPLE REGISTRATION.

1. Separate registration of multiple place of business-

Where an assessee provides a taxable service from more than one premises or offices and doesnot have centralized billing system or centralized accounting system, he shall make separateapplication for registration of each of such premise or office.

2. Multiple services:

If an assessee provides more than one taxable services, he need not apply for separate registrationfor each such taxable service. Single application mentioning therein all the taxable servicesprovided shall be sufficient.

a. Commencement of services at the same time: The applicant in a single application may bemade mentioning all the taxable services provided by him.

b. Commencement of services at different points of time: The applicant has already registeredfor one service but subsequently becomes liable for another category of service, he should gethis certificate endorsed for the category of service.

3. Changes in existing certification of Registration:

a. Change in information provided in ST-1: Intimated in writing to the jurisdictional assistantcommissioner within a period of 30 days of such change.

b. Change of place: A new registration certificate should be applied for, and the previousregistration certificate should be cancelled.

c. Transfer of business: Where the assessee transfers his business to another person, thetransferee should obtain a fresh certificate of registration.

Q.NO.28)EXPLAIN THE PROCEDURE FOR SURRENDER OF REGISTRATION OFCERTIFICATE?

1. Surrender of Registration of certificate:

a. Circumstances:

Cessation of Services

Change of Place


17/31


18/31




3. Return is to be filed half yearly in Form ST-3 (Form ST 3A for PA). The half yearly due datesare:

For half year Return to be filed on or before

1st April to 30th September 25th October

1st October to 31st March 25th April

4. E-filing of returns is also permissible through the internet using computer. The website for filinge-returns is www.servicetaxefiling.nic.in

5. If the due date is a public holiday then the return should be filed on the next working day.

6. Revised returns may be filed within 90 days from the date of filing of original return.

7. For delay in filing returns, late fee is payable as follows :

Period of Delay Penalty to be paid

Upto 15 days Rs.500

16 days to 30 days Rs.1,000

More than 30 days Rs.1,000 plus Rs.100 per day (from the 31st day)till the date of filing returns(Maximum of Rs.2,000)

8. Where the gross amount of service tax payable is nil, the Central Excise Officer may, on beingsatisfied that there is sufficient reason for not filling the return, reduce or waive the penalty (latefee).

9. Nil return should also be filed within the prescribed time limit.

10.

Filing of single return is sufficient in case of multiple service provider. However necessary detailsin each of the columns of Form SR-3 have to be furnished separately for each of the taxableservice rendered by him. Thus, instead of showing a lump sum figure for all the services together,service wise details should be provided in the return.

Q.NO 31) WHAT ARE THE CONTENTS OF RETURN ?

Apart from the general details, like financial year, half year period (April-September or October-March), name of the assessee, registration number of the premises for which return is being filed,category of taxable services, the contents of the return inter alia, also include month-wise details of

a) amount received towards taxable serviceb) amount received in advance towards taxable service to be providedc) amount billed for exempted services and services exported without payment

of taxd) amount billed for services on which tax is to be paide) service tax payablef) education cess payableg) TR-6 challan date and number

Further, half yearly details of other payments like interest, arrears and excess amount paid andadjusted subsequently and details of amount payable but not paid as on the last day of the period forwhich the return is filed are also to be provided in the return.
http://www.servicetaxefiling.nic.in/http://www.servicetaxefiling.nic.in/


19/31




Q.NO.32) WHAT ARE THE DOCUMENTS TO BE ATTACHED ALONG WITH RETURN?

Documents to be attached along with return

The following documents that are to be attached along with ST-3

1. Copies of TR-6 challans, for payments made.2. Memorandum ST-3A, in case of provisional payment of tax giving full details of difference

between the amount of provisional amount of tax deposited and the actual amount payable foreach month. Form ST-3A is to be attached only when the assessee opts for provisional payment ofservice tax.

3. In case of first return, details of accounts maintained in relation to Service tax should be furnishedto superintendent of Central Excise, at the time of filing first half yearly return i.e., ST-3, a list ofall accounts maintained by him in relation to service tax including memorandum received fromhis branch office.

Q.NO.33) BRIEFLY EXPLAIN SERVICE TAX RETURN PREPARERS SCHEME?

Service Tax Return preparers Scheme:

1. Definitions:

a. Service Tax Return Preparer: It refers to an individual who has been authorized to act as aService Tax Return Preparer under a scheme framed under this section.

b. Specified Classes of persons: It refers to persons specified in the Scheme, who are required tofurnish a return required to be field under section 70.

2. Power of Board: The CBEC is empowered to frame a scheme for furnishing return of income by

any specified classes through a Service Tax Return Preparer.3. Duty of Service Tax Return Preparer: Every Service Tax Return Preparer should assist the

specified classes of persons to prepare and furnish the service tax return in the manner specifiedin the scheme.

4. Structure of the Scheme: The scheme framed by the Board may provide for the following

a. Manner in which and the period for which the Service Tax Return Preparer shall be authorized,

b. Educational and other qualifications to be possessed, and the training and other conditionsrequired to be fulfilled, by a person to act as a Service Tax Return, Preparer,

c. Code of Conduct for the Service Tax Return Preparer,

d. Duties and Obligations of the Service Tax Return Preparer,

e. Circumstances under which the authorization given to a Service Tax Return Preparer may bewithdrawn,

f. Any other matter which is required to be specified by the Scheme for the purposes of this section.

Q.NO.34) BRIEFLY EXPLAIN IMPORT OF SERVICES?

Charge of service tax on service received from outside India (Section 66A) - Import

Where any service specified in section 65(105) is provided or to be provided by a person who has:

1. established a business or has a fixed established in a country outside India, or

2. his permanent address or usual place of residence is India.


20/31




Such service is received by a person (i.e., recipient) who has his place of business, fixedestablishment, permanent address or unusual place of residence in India.

It will be treated as if recipient himself has provided such service in India and it will be chargeable totax in his hands instead of the service provider.

However, if the recipient of the service is an individual, such service shall not be taxable unless it hasbeen received by him in any business or commerce.

i.e. No service tax is payable on import of service for personal use of individual.

Q.NO.35) BRIEFLY EXPLAIN EXPORT OF SERVICES?

Export: A service shall be considered as Export if following conditions are satisfied:

1. service should be performed from India and used outside India,

2. payment for such service should be received in Convertible Foreign Exchange.


21/31




VAT - Concepts and General Principles

Value Added Tax or VAT is a broad based tax levied at multiple stage with tax on inputs creditedagainst taxes on output.

VAT was first introduced in France in 1954, but it remained confined to handful number ofcountries till the 1980's. With this imposition, France became the first European country to implementVAT on an extensive scale.

The development of VAT in other countries suggests that although it was not adopted by manycountries until the sixties, over the years the tax has come to occupy an important place in the fiscalarmory of nearly all industrialized countries and in a large number of Latin American, Asian andAfrican countries. As many as 30 countries have switched over to VAT since 1980 and the totalnumber of countries who have adopted VAT presently reached to more than 130. Thus, theaugmentation of interest in VAT has been the most remarkable event in the evolution of commoditytaxes in the present century. In addition, as of today, VAT is evenly distributed throughout the

world, though it is particularly predominant in Europe and Latin America.VAT has replaced the general sales tax structure with the only difference in the manner of its

levy. The power to levy tax on sales transactions in the form of VAT is drawn from entry 54 in List IIof Seventh Schedule of the Constitution of India by the State Governments. Under VAT, every saletransaction taking place in the course of business is taxed enabling the Government to collect revenueon value addition at every stage. The cascading effect of VAT being collected at every stage on the costof goods is reduced byproviding set off of tax paid on the purchases.

1. Evolution of VAT in India

India already had a system of tax collection wherein the tax was collected at one point from thetransactions involving the sale of goods. The single point tax was collected either at the first stage orat the last stage.

The system of collecting tax at first stage had the following disadvantages:(a) Since sales tax was levied and collected at the first stage (i.e., at the stage of the wholesale), the

tax rate had to be higher. This encouraged tax evasion and sales tax became a tax on honesty,which means the honesty, more the tax liability.

(b) In case somehow the goods escaped the tax at the first stage, the goods escaped tax netaltogether since there was no way by which it could be caught at any subsequent stage.

(c) There was ample scope for under-valuation of the value of the goods at first stage, since therewas no tax payable at any subsequent stages, even if the goods were subsequently sold at

much higher prices.In the system of collection of tax at the last stage also, several weaknesses were witnessed:(a) The tax evasion was maximum since the price level at the last point of sale increases, which

encouraged evasion, even if the tax rates were low;(b) It was difficult to track the goods evading tax since there was no record of their earlier

movements and after the last point sale, the goods reached in the hands of the consumers;(c) This also encouraged under-invoicing and involves generation of black money due to cash

dealings at the last point of sale.

Since VAT is collected at various stages, all the above disadvantages and weaknesses have beenovercome, the cascading effect of taxes is eliminated. More transparent structure is made up andcompliance are improved.

India has been slow in adoption of VAT. In domestic trade taxes, it adopted excise duty at thecentral level and sales tax at the state level for this purpose.

The Central Government attempted reforms in the central excise duty by introducing the


22/31




principles of VAT in 1986 through the introduction of MODVAT. Over the period the rates have beenrationalized, exemptions have been reduced and the coverage has been extended to almost all thecommodities. MODVAT has now been converted into a central VAT, coined and called CENVAT.CENVAT is now also allowed on input services.

The state governments had been indifferent in undertaking any reforms in their sales tax system,

although it accounts for approximately 60% of the state's own tax revenue. The existing sales taxsystem of the states was confronted with many drawbacks and weaknesses.

The Task Force known as Kelkar Committee observed that presently, "each State levies multipletaxes on the same item in different names or at different stages e.g. Entry Tax, Luxury Tax, etc."However, it opined that "it is necessary that State VAT should be the tax to unify all the State-leveltaxes i.e. Sales Tax, Purchase Tax, Turnover tax, Works Contract Tax, Entry Tax, Special AdditionalTax, etc. should all be covered under State VAT.

The efforts were initiated towards introduction of VAT since last many years. The Committees ofStates' Finance Ministers (in 1995 and 1998, respectively) and of the Chief Ministers (in 1999) have putforth recommendations to replace sales tax by VAT. This was ratified by the Conference of the ChiefMinisters and Finance Ministers held on November 16, 1999 and introduction of State VAT in lieu of

Sales Tax was finally scheduled to be made with effect from 1-4-2003.However, the schedule had to be revised in view of agitative traders' community. The

Empowered Committee of State Finance Ministers agreed upon 1-6-2003 as the revised date ofimplementation of VAT and it was expected that most of the State and Union Territories willimplement VAT from 1-6-2003, but it did not happen.

Later, the Finance Minister deferred the implementation of VAT for some more time so that moreconducive environment may be created and agitative opposition may be set to peace. Besidesconsensus of all the states over the model law and introduction of VAT on uniform basis was alsonecessary. On 30-4-2003 he announced that unless all States conform to model draft law and agreedVAT rates, introducing VAT on 1-6-2003 will not be possible. He stated that VAT should beimplemented all over India. Patchwork will not serve the purpose. In this connection, the

Empowered Committee of State Finance Ministers met regularly and brought out a White Paper onState level VAT on 17-1-2005.

This White Paper on State-level Value Added Tax (VAT) was presented in three parts:

Part 1: In this part, the justification of VAT and its background had been mentioned

Part 2: The main design of VAT. While doing so, it recognized that this VAT is a State subject andtherefore the States will have freedom for appropriate variations consistent with the basic design asagreed upon by the Empowered Committee.

Part 3: Part 3 discussed the other related issues for effective implementation of VAT.

Justification of VAT and Background

In the existing sales tax structure, there are problems of double taxation of commodities and

multiplicity of taxes, resulting in a cascading tax burden. For instance, in the existing structure, before a commodity is produced, puts are first taxed,

and then after the commodity is produced with input tax load, output is taxed again. Thiscauses an unfair double taxation with cascading effects.

In the VAT, a set-off is given for input tax.

In the prevailing sales tax structure, several States levying multiplicity of taxes, such asturnover tax, surcharge on sales tax, additional surcharge, etc. With introduction of VAT,these other taxes will be abolished. In addition, Central sales tax is also to be phased out. Asa result, overall tax burden will be rationalized, and prices in general fall.

Further, VAT will replace the existing system of inspection by a system of built-in self-

assessment by the dealers and auditing. The tax structure will become simple. That will improve tax compliance and also augment

revenue growth.


23/31




The VAT will therefore help common people, traders, industrialists and also the Government. Itis indeed a move towards more efficiency, equal competition and fairness in the taxation system.

All States and Union Territories have gradually introduced VAT in India except the State ofUttrakhand. VAT has not been introduced in Jammu and Kashmir due to constitutional limitation.

2. What is VAT

VAT is a tax, which is charged on the 'increase in value' of goods and services at each stage ofproduction and circulation. It is also chargeable on the value of all imported goods. It is charged byregistered VAT businesses/persons/taxpayers. VAT has replaced a number of other taxes and itsintroduction has not resulted in either increased prices to final consumers or reduced profitability ofbusiness. VAT is levied on the difference between the sale price of the goods produced or the servicesrendered, and the cost thereof __that is, the difference between the output and the input.

In other words

It is nothing but multi-point Sales Tax.

It is collected on value addition only at each stage.

Tax paid by the dealer is deducted from the tax payable collected at every point of sale andthe tax already paid.

3. How is VAT different from the Sales Tax?

Sales Tax Under VAT

1. Tax levied at the stage of thefirst sale or at the final stage

1. Tax levied and collected at every point of sale

2. Successive sales (resale) of

goods on which tax is alreadypaid do not attract tax

2. Tax collected at every point of sale and the tax

already paid by the dealer at the time of purchaseof goods will be deducted from the amount of taxpaid at the next sale

3. Dealers reselling tax paid goodsdo not collect any tax on resaleand file NIL returns

3. Dealers reselling tax-paid goods will have tocollect VAT and file returns and pay VAT at everystage of sale (value addition)

4. Computation of tax liability iscomplex

4. It is transparent and easier

5. Sales Tax is not levied at thetime of purchases againststatutory forms but there ismisuse of such forms resultingin tax evasion.

5. VAT dispenses with such forms and sets off all taxpaid at the time of purchase from the amount oftax payable on sale

6. Returns and challans are filedseparately and the dealers haveto give numerous details

6. The returns and the challans are filed together in asimple format after self-assessment done by thedealer himself

7. A large number of forms arerequired

7. At the most a few forms are required

8. Tax on goods only 8. Tax on goods and services both.

9. Assessment done by thedepartment

9. Self-assessments by dealers

10. Penalty for defaulters/evadersnot strict

10. Penalties will be stricter


24/31




4. How to calculate VAT?

VAT is calculated by deducting tax credit from tax collected during the payment period.

Further, every time the VAT is charged, it is not an expense to the person who pays it, but just anadvance to the government via the supplier. This is true for all except the final customer who cannotclaim the VAT deduction. Actually, he is the only one who pays the full amount.

5. Eligible purchases for availing input tax credit

The input tax credit is available only when the taxable goods are purchased for the followingpurposes

(1) For sale/resale within the State;

(2) For sale in the course of inter State trade or commerce; i.e. Goods are sold to any other State or

Union Territory of India;(3) To be used as

(i) Containers or packing materials;

(ii) Raw materials; or

(iii) Consumable stores,

and the goods so manufactured by the use of the above raw-materials, packing materials aresold within the State or in the course of inter State trade commerce;

(4) For being used in the execution of a works contact;

(5) To be used as capital goods required for the purpose of manufacture of taxable goods;

(6) To be used as

(a) Raw materials;

(b) Capital goods;

(c) Consumable stores; and

(d) Packing materials/containers

and goods so manufactured by the use of above items are sold in the course of export out ofthe territory of India.

6. Coverage of Set-Off/Input Tax Credit

(1) Instant credit of input taxThis input tax credit will be given both to the manufacturers and traders for purchase of

inputs/supplies meant for both sales within the State as well as to other States, irrespective of whenthese will be utilized/sold. This also reduces immediate tax liability.

(2) No input credit on central sales tax paid on purchases from other States

At present, there is no credit of CST if inputs are purchased from outside the State. For example ifthe goods are purchased by Delhi dealer from Mumbai for Rs. 1,02,000 which includes CST of Rs.2,000, Delhi dealer will not get input tax credit of Rs. 2,000. If goods are sent outside State on stocktransfer basis, credit (set off) of tax paid on inputs purchased within the State is available only to theextent of tax paid in excess of 2% e.g. if tax paid on inputs is 12.5%, input credit of 10.5% is available.

(3) Input credit on stock transfer to other States

When CST rate is reduced to Nil, full credit of tax paid on inputs will be available i.e. inter-statesales and dispatches will be 'zero rated' and not 'exempt'.


25/31




7. Purchases not eligible for input tax credit

Input credit is not be allowed in the following circumstances:

1. Purchasing from unregistered dealers;

2. Purchases from registered dealer who opt for composition scheme under the provisions ofthe Act;

3. Purchases of goods as may be notified by the State Government;

4. Purchase of goods where invoice does not show the amount of tax separately;

5. Purchase of goods, which are utilized in the manufacture of exempted goods;

6. Purchase of goods used for personal use/consumption or provided free of charge as gifts;

7. Goods imported from outside the territory of India or goods purchased before it reaches thecustom frontiers of India;

8. Goods purchased from other States viz. inter-State purchases.

8. Input tax credit on capital goods

Input tax credit on capital goods will also be available for traders and manufacturers. Tax crediton capital goods may be adjusted over a maximum of 36 equal monthly installments. The States mayat their option reduce this number of installments.

There is a negative list for capital goods (on the basis of principles already decided by theEmpowered Committee) which is not eligible for input tax credit.

9. Coverage of Goods under VAT

In general, all the goods, including declared goods will be covered under VAT and will get thebenefit of input tax credit.

The only few goods which will be outside VAT will be liquor, lottery tickets, petrol, diesel,aviation turbine fuel and other motor spirit since their prices are not fully market determined. Thesewill continue to be taxed under the any other State Act or even by making special provisions in theVAT Act itself, and with uniform floor rates decided by the Empowered Committee.

10. VAT Rates and Classification of Commodities Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4%

and 12.5%, plus

a specific category of tax-exempted goods and

a special VAT rate of 1% only for gold and silver ornaments.

11. Non-availability of input credit in certain cases

In the following cases credit of tax paid on inputs shall not be allowed:

1. Where final product is exempt Credit of tax paid on inputs is available only if tax is paid on

final products. When final product is exempt from tax, credit will not be allowed. If credit wasavailed, it will have to be reversed on pro rata basis.


26/31




2. No credit if input lost/damaged/stolen before use Where the inputs have been lost or damagedor stolen before these have been used, credit of tax paid on such input shall not be allowed. Ifcredit was availed, it will have to be reversed.

3. No credit on certain purchase Generally, in following cases, credit is not available

(a) Purchase of automobiles

(b) Fuel. However, some States are allowing input credit for the same.

12. Origin/destination principle

The following two principles are relevant for implementation of VAT

(a) Origin principle.

(b) Destination principle.

(a) Origin principle: Under 'origin principle', value added domestically on all goods whetherthey are meant for exports or to be consumed in India is subjected to tax. Hence, if there is valueadded abroad tax cannot be levied on such value added in India. This principle confines VAT only to

goods originating in the country of consumption. Whereas exports are taxable under this principlebut imports are exempt. It is mostly used in conjunction with income VAT and is unpopular forobvious reasons.

(b) Destination principle: Under this principle, value added irrespective of the place of origin istaxable. All goods are taxed if they are consumed within the country. Consequently, exports areexempt while imports are subjected to tax. Destination principle is normally used along withconsumption VAT. In a federal set-up like India, destination principle is preferred for taxation ofproducts consumed within the various States of the country. A very important feature of thisprinciple is that imported goods are treated at par with domestic products whereas in the originprinciple imported goods are not taxable and hence it gives preference to goods produced abroad. Inthe EEC countries, origin principle was once considered for eliminating border controls andproblems of valuation, but was subsequently given up as being impractical. Thus the destinationprinciple is now being followed in those countries.

13. Variants of VAT

(a) Gross Product Variant

In case of Gross Product Variant, tax is levied on all sales but deductions for taxes on allpurchases of raw materials and components (i.e. inputs) are allowed. However, no deduction isallowed for taxes paid on capital inputs with the result that in this variant of VAT, capital goodscarry a heavier tax burden as they are taxed twice.

(b) Income Variant

In case of Income Variant, tax is levied on all sales but deductions towards purchases of rawmaterials and components (i.e. inputs) as well as depreciation on capital goods are allowed. Thosefollowing this variant of VAT hold incentives by classifying purchases as current expenditure toclaim set-off. In this variant, gross investment minus depreciation i.e. net investment is taxed. Thedepreciation to be provided is dependent on the life of an asset as well as on the rate of inflation,therefore there are many difficulties connected with the variant in measuring depreciation.

(c) Consumption Variant

In case of Consumption Variant, tax is levied as all sales but deduction on all business purchasesincluding capital assets is allowed. Thus, gross investment is deductible in calculating value added.The economic base of the tax, under Consumption Variant of VAT is equal to the total private

consumption. This variant of VAT does not distinguish between capital and current expenditureshence there is no need to specify the life of assets or depreciation allowances for different assets. Thisform is neutral between the methods of production; there will be net effect on tax liability due to the


27/31




method of production (i.e. substitution capital for labour or vice versa). The tax is also neutral betweenthe decision to save or consume.

The consumption variant of VAT is most popular and widely used variant among the threevariants of VAT. The reasons behind the preference of this variant over the other are as under:

(a) This variant is tax neutral as it does not affect decisions regarding investment because the taxon capital goods is also set-off against the VAT liability.

(b) This variant relieves all exports from taxation while imports are taxed which is harmoniouswith the destination principle i.e. if the destination of goods is foreign country, it should notbe taxed in India.

(c) The consumption variant is convenient from the point of administrative expediency as itsimplifies tax administration as it distinguishes between purchases of intermediate andcapital goods on the one hand and consumption goods on the other hand.

(d) It does not cause any cascading effect.

14. Method for Computation of tax

(A) Invoice method/Tax credit method

Tax credit method involves payment of tax by the seller i.e. manufacturer or dealer at full sellingprice and credit of tax is allowed, which he has paid at the time of purchase. Thus, the tax is levied onfull sale price, but credit is given of tax paid on purchases and effectively, tax is levied only on 'ValueAdded' only.

It's an easy and simple way to ensure that tax is paid. It helps elimination of cascading effect oftax on consumers.

(B) Subtraction methodUnder subtraction method, the purchase price is deducted from selling price and tax is paid on

the net amount only i.e. value added. Thus, when the tax is paid on net amount, dealer's margin isdisclosed.

This method is unpopular and cumbersome. It is practically impossible when various inputs areused in the manufacture of numerous outputs. It is also not preferred by dealers as their margin getsdisclosed.

Example

Suppose a manufacturer sells goods to a trader for Rs. 220 which includes tax charged @ 10%. Thetrader sells the same goods to a consumer for Rs. 388 which also includes tax charged @ 10%. The tax

in this case shall be worked as under:Manufacturer sells the goods to traderTurnover VAT @ 10%

220 20

[220 10/110]

Trader sells the goods to consumerTaxable turnover shall be 8

308 - 220 = 88 88 [88 10/110]

Total tax Rs. 20 + 8 = Rs. 28.

In the above system also, the incidence of tax is at each stage.


28/31




15. Advantages of VAT

VAT being a broad based tax levied at multiple stages is generally perceived as an explicitreplacement of State sales tax for raising additional revenue for the Government. The puSrpose of atax system is to bring in revenues to the Government. Tax revenues can be raised in many ways.However, the main characteristic of good tax system should be

The tax system should be fair or equitable;

It should cause the least possible harmful effects to the economy and to the extent possible, itshould promote growth to the economy;

It should be simple both for its compliance by the payer and for its administration by theGovernment;

It should be income elastic.

Keeping in view the above objectives, VAT is being implemented in various states in place of thelocal sales tax payable by the seller. VAT is also expected to be more effective and efficient for every

person including Government, manufacturers, traders and consumers and hold the followingadvantages:

(i) It is easy to administer and transparent because of its simplicity.

(ii) There are less scope of litigation

(iii) Tax Credit on purchase of Capital Goods is also allowable.

(iv) There are no statutory forms under VAT. Therefore, all problems related to formsautomatically get resolved.

(v) There is provision for Self-Assessment

(vi) It will act as deterrent against tax avoidance.

(vii) It does not have cascading (tax on tax) effect due to system of deduction or credit mechanism.

(viii) It supports Effective Audit & Enforcement Strategies

(ix) The system will be more effective because of minimum exemptions.

(x) It ensures removal of anomaly of First Point Taxation

(xi) Export can be freed from domestic trade taxes in real sense.

(xii) It is an instrument to tax consignment of goods

(xiii) Economic Advantages

(a) Buoyant Revenue,

(b) Efficient tax collection,

(c) Neutrality with minimum dist,

(d) Interference in market forces is minimum.

16. Limitations of VAT

(i) Detailed Records are required for VAT purpose.

(ii) VAT causes Inflation

(iii) No provisions for early refund of tax in case of exempted goods or export of final goods.

(iv) There are many functional problems

(v) Dealer will be making purchases after paying tax, therefore investment in stock will go up theextent of tax paid.

(vi) No Credit for Tax paid on Inter-state Purchases


29/31




(vii) Introduction of composition scheme will obstruct the flow of audit trail and this scheme canbe misutilised by unscrupulous dealer.

(viii) Financial planning by Department

(ix) Audit under VAT

It will also be difficult to administer the tax systems at wholesale and retail stage as they usuallydeal in numerous products and commodities, which carry different rate. Thus matching of outputand input taxes is difficult. Ideally VAT should have very few rates which does not seem to bepossible in India due to varying and diverse fiscal and social requirements. In case matchingrequirement is waved off there is a possibility of tax evasion as explained hereunder:

Purchases made by a DealerAmount (In Rs.)

1% 4% 8% 20% Total1,000 1,000 1,000 1,000 4,000

Tax Paid10 40 80 200 330

Sales Shown by DealerCase A

I II III IV Total1,200 1,200 1,200 1,200 4,800

12 48 96 240 396Tax Liability (Rs. 396 - Rs. 330) = Rs. 66Case B

I II III IV Total1,400 1,200 1,200 1,000 4,800

14 48 96 200 358Tax Liability (Rs. 358 - Rs. 330) = Rs. 28.

17. Need of audit under VAT

(A) Lack of Education among Traders Community

In our country the trading community is not educated enough therefore they face problem inunderstanding the requirements of tax laws. Moreover the VAT system of taxation is new to thetrading community.

Due lack of knowledge and unawareness, the traders are not well equipped to understand theimplications of the VAT system of taxation. Keeping these factors in view the State Government inorder to arrange their business affairs to fall in line with the requirements of the State Level VAT,calculate and discharge their exact tax liability under the VAT Law have incorporated auditprovisions in VAT Acts.

(B) Lack of Resources with Taxation Authorities

The taxation authorities do not have sufficient resources to educate the tax payers and informthem about the procedural requirements and accounting changes that are required under VATsystem. Due to lack of resources, the taxation authorities are also not in a position to ensure that allthe requirements of VAT are being fulfilled and there is no loss of Government revenue. Therefore, itis desirable to prescribe for an audit under VAT by a qualified professional so that the taxationauthorities may the procedural requirements.

(C) Self-Assessment under VAT regime

Another reason for prescribing an audit under the VAT by a Chartered Accountant, is that underthe VAT system a major thrust is to be laid on the 'self assessment'. The dealer/assessee calculates itstax liability himself and thereafter pays the same. The tax payers through their periodical returns


30/31




inform the Department about its business affairs. These periodic returns are accepted by and largeand the tax payers are not to be called for substantiating their tax liability as shown by them in thereturns by producing books of account and other relevant material. The assessments with books ofaccount will be an exception. Therefore there is a strong need to see that the tax payers dischargetheir tax liability properly while filing the returns. This can be ensured only where the particulars

furnished by the tax payers are verified by an independent auditor in minute details by going notonly through the books of account but also by analyzing and interpreting the provisions of the State Level VAT Laws and reporting, whether any under-assessment was made by the dealer requiringadditional payment or whether there was any excess payment of tax warranting refund to the taxpayer.

Due to these factors and requirements audit under VAT become essential and shall be performedon a regular basis. However, it is not possible to conduct the audit of all the VAT dealers. Therefore,the criteria for audit can be the amount of turnover or the class of dealer dealing in specifiedcommodities.

18. General requirement for VAT System(a) Compulsory issue of tax invoice and Retail Invoice: The entire design of VAT with input tax credit

is crucially based on tax invoice, or retail invoice.

Tax invoice: Every registered dealer, having turnover of sales above an amount specified, shallissue to the purchaser serially numbered tax invoice with the prescribed particulars.

This tax invoice will be signed and dated by the dealer or his regular employee, showing therequired particulars.

The dealer shall keep a counterfoil or duplicate of such tax invoice duly signed and dated. Failureto comply with the above will attract penalty.

The purchaser will get input credit on the basis of the said tax invoice.

Retail invoice: Where sales are made to a consumer or in the course of inter-State trade andcommerce, the dealer shall issue retail invoice. No input credit is available to purchaser on the basisof this retail invoice.

(b) Registration: There is a compulsory registration of the dealer if the aggregate turnover exceedsa certain specified limit. It is Rs. 5,00,000 in most of the States whereas in Delhi it is Rs. 10 lakhs. Smalldealers whose gross turnover does not exceed Rs. 5 lakh/10 lakh shall not be liable to pay VAT.These small dealers will not be allowed input tax credit on their purchases. Small dealers may alsoget voluntary registration and come under the purview of VAT provisions.

(c) Composition scheme: A small dealer whose turnover does not exceed a specified limit (say inDelhi Rs. 50 lakhs) can opt for composition scheme where he shall have to pay tax himself at a smallpercentage of gross turnover and in this case buyer of goods with not be entitled to input VATCredit.

(d) Tax Payer Identification Number (TIN): There will be a taxpayers identification number of 11digit numericals which will be unique to each dealer. First two characters will represent the StateCode as used by the Union Ministry of Home affairs. The set up of the next nine characters may,however, be different in different States.

(e) Simplified return of VAT are to filed monthly or quarterly as specified by each State.

Every return furnished by dealers will be scrutinized expeditiously within prescribed time limitfrom the date of filing the return. If any technical mistake is detected on scrutiny, the dealer will berequired to pay the deficit appropriately.


31/31


(f) Self-assessment by dealers.

Procedure of Self-Assessment of VAT Liability

The basic simplification in VAT is that VAT liability will be self-assessed by the dealersthemselves in terms of submission of returns upon setting off the tax credit.

Return forms as well as other procedures are simple in all States.

There will not longer be compulsory assessment at the end of each year as is existing now. Ifno specific notice is issued proposing departmental audit of the books of accounts of thedealer within the time limit specified in the Act the dealer will be deemed to have been self-assessed on the basis of returns submitted by him.

(g) Audit under VAT has been made compulsory by various States.

(h) No requirement of any declaration form as bill will be raised for each sale and VAT shall belevied.

(i) Comprehensive coverage as only few commodities have been exempted from VAT.